June quarter GDP as expected. Investment continues to struggle for momentum

As expected, China GDP rose by 6.2% over the year to June 2019. A step-down from 6.4%yr in March 2019 and December 2018, the result puts the economy on track to achieve full-year growth at the bottom end of authorities’ 6.0–6.5% 2019 target range.

Net exports’ contribution to growth started 2019 on a particularly strong footing, contributing 1.5ppts in year-to-date terms at March. Unsurprisingly, three months later, this contribution has throttled back to 1.3ppts as the pull-forward of export activity to get ahead of US tariffs drew to a close. As we move through the second half, this contribution should diminish further.

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This trend places the focus for growth on consumption and investment.

Compared to this time last year, the contribution from total consumption is materially weaker, at 3.8ppts versus 5.3ppts in 2018. We cannot definitively say that this deceleration is entirely due to the household sector as public consumption is also included. However, given the weakness evident in the NBS PMI employment series, it seems safe to assume households are under pressure and have become more cautious in their spending over the past year.

Corroborating this view, year-to-date growth in retail sales was 8.4%yr at June 2019, 1ppt below June 2018, and 2ppts below June 2017.

Turning then to investment, the sector’s addition to real GDP growth in 2019 (1.2ppts) is roughly 1ppt below the average contribution of 2018 and 2017. Further, with year-to-date investment growth at June on par with the average of the past year (5.8%yr), momentum clearly remains hard to come by.

A major concern for the investment outlook remains the variability of outcomes across industry.

Of the weaker industries, a lack of progress accelerating growth in manufacturing (3.0%yr) and utilities (–0.5%yr) best highlight China’s challenges. This is because the former speaks to the scale of the ‘uncertainty’ headwind created by US tariffs, the latter the equally-important legacy of authorities’ quality investment reforms of 2017 and 2018.

While we expect investment growth to firm through the second half thanks to improved credit availability and lower interest costs, the above headwinds will persist. They also emphasize that risks to the activity view are set to remain skewed to the downside for the foreseeable future.

We continue to look for full-year growth of 6.1% in 2019 and 6.0% in 2020.


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